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Ahead of the Tape: Earnings Recession Is Over, but Don't Expect Investors to Celebrate -- WSJ

Ahead of the Tape: Earnings Recession Is Over, but Don't Expect Investors to Celebrate -- WSJ

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November 14, 2016

By Steven Russolillo

The earnings recession is finally over, but that might not be enough to push the market higher from here.

With more than 90% of S&P 500 companies having reported results for the latest quarter, earnings for the biggest U.S. companies are finally growing again. Third-quarter adjusted earnings are projected to increase 2.9% from the same period a year ago, according to FactSet. That marks the first year-over-year growth rate after five consecutive quarters of contractions.

Better times should be ahead, too, thanks to stabilizing oil prices and the rebounding energy sector. Energy companies such as Exxon Mobil Corp. and Valero Energy Corp. should benefit. Their earnings growth is forecast to bounce back significantly in 2017 following several quarters of contractions, according to S&P Global Market Intelligence.

And it isn't just energy companies that should rebound. Technology titans such as Apple Inc., the biggest contributor to S&P 500 earnings, and International Business Machines Corp. are expecting earnings growth will return in 2017. The same should hold true for videogame maker Electronic Arts Inc. and hard-disk-drive maker Western Digital Corp.

But there is a difference between an earnings recession ending and earnings growing impressively. A year ago, analysts were calling for earnings growth of 13.1% for the recently completed quarter. That projection fell sharply and even turned negative as recently as September before recently bouncing back into positive territory.

"The further out you go, the more optimistic analysts tend to be," said John Butters, senior earnings analyst at FactSet.

History might be repeating itself. Earnings growth this quarter is expected to improve to 3.5%, followed by 11.4% and 10.5% in the first two quarters of 2017.

The earnings-expectation game will continue, meaning the bar will inevitably be lowered. But investors seem to have caught on. They haven't rewarded so-called earnings beats as much as they used to.

For the third quarter, Mr. Butters found an S&P 500 company's stock price rose 0.7%, on average, in a four-day span following an earnings report that beat expectations. That is roughly half the average gain in a comparable time frame over the past five years. Earnings misses were punished more than usual, too.

The reason why could be because stocks are near records. That is unusual after an earnings recession. Even if earnings keep rising, there is no guarantee companies will be rewarded by investors.